Premier Investments (ASX:PMV) Seems To Use Debt Rather Sparingly

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Premier Investments Limited (ASX:PMV) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Premier Investments

How Much Debt Does Premier Investments Carry?

The image below, which you can click on for greater detail, shows that Premier Investments had debt of AU$69.0m at the end of January 2022, a reduction from AU$146.7m over a year. However, its balance sheet shows it holds AU$478.9m in cash, so it actually has AU$409.9m net cash.

A Look At Premier Investments' Liabilities

Zooming in on the latest balance sheet data, we can see that Premier Investments had liabilities of AU$426.1m due within 12 months and liabilities of AU$225.9m due beyond that. Offsetting these obligations, it had cash of AU$478.9m as well as receivables valued at AU$14.3m due within 12 months. So it has liabilities totalling AU$158.9m more than its cash and near-term receivables, combined.

Of course, Premier Investments has a market capitalization of AU$4.14b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Premier Investments also has more cash than debt, so we're pretty confident it can manage its debt safely.

Fortunately, Premier Investments grew its EBIT by 4.8% in the last year, making that debt load look even more manageable. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Premier Investments can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Premier Investments has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Premier Investments actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Premier Investments has AU$409.9m in net cash. And it impressed us with free cash flow of AU$317m, being 127% of its EBIT. So is Premier Investments's debt a risk? It doesn't seem so to us. Given Premier Investments has a strong balance sheet is profitable and pays a dividend, it would be good to know how fast its dividends are growing, if at all. You can find out instantly by clicking this link.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.